Hospital Inpatient Drug Costs NORC Report

This graph is familiar to any Econ 101 student – as price goes up, demand goes down. This is what prevents a supplier increasing price and profit at will. But, the big assumption in this law of economics is that the buyer actually knows the price.

A recent report from the NORC at the University of Chicago shed’s light on the impact of increasing inpatient drug costs in hospitals. “One hospital put the challenge starkly: last year, the price increases for just four common drugs, which ranged between 479 and 1,261 percent, cost the same amount as the salaries of 55 full-time nurses.”

“Between FY2013 and FY2015, inpatient drug spending increased an average 38.7 percent annually, on a per admission basis. Over 90 percent of responding hospitals reported that recent inpatient drug price increases had a moderate or severe effect on their ability to manage the overall cost of patient care, with one third of the respondents indicating that the impact was severe.”

Who is the “buyer” of inpatient medications? Hospitals pay their wholesale supplier for medications, so it is understandable for hospitals to think of themselves as the buyer. They certainly pay the bill. But, the decision about which and how much medicine to use for each patient is a judgment made by the ordering physician. As such, physicians are the ones making the “buying decision.”

Hospitals don’t routinely inform their physicians of the cost of the medications they order. The buyer doesn’t know the price!

One study concluded, “Doctors’ ignorance of costs, combined with their tendency to underestimate the price of expensive drugs and overestimate the price of inexpensive ones, demonstrate a lack of appreciation of the large difference in cost between inexpensive and expensive drugs. This discrepancy in turn could have profound implications for overall drug expenditures.”

If given a choice between two equally efficacious drugs that are materially different in price, physicians will choose the cheaper option. They don’t want to waste the health system’s limited resources; and they know that their patients, with higher deductibles and deteriorating health insurance benefits, will struggle to maintain a higher cost treatment regimen post-discharge.

The “invisible hand” of market forces is powerful. It is time for hospitals to empower their providers with medication cost data at the point of care. Only then will there be a check on irrational drug price increases, which are crippling our health system.

Who is the “buyer” of inpatient medications? Hospitals pay their wholesale supplier for medications, so it is understandable for hospitals to think of themselves as the buyer. They certainly pay the bill. But, the decision about which and how much medicine to use for each patient is a judgment made by the ordering physician. As such, physicians are the ones making the “buying decision.”

Hospitals don’t routinely inform their physicians of the cost of the medications they order. The buyer doesn’t know the price!

One study concluded, “Doctors’ ignorance of costs, combined with their tendency to underestimate the price of expensive drugs and overestimate the price of inexpensive ones, demonstrate a lack of appreciation of the large difference in cost between inexpensive and expensive drugs. This discrepancy in turn could have profound implications for overall drug expenditures.”

If given a choice between two equally efficacious drugs that are materially different in price, physicians will choose the cheaper option. They don’t want to waste the health system’s limited resources; and they know that their patients, with higher deductibles and deteriorating health insurance benefits, will struggle to maintain a higher cost treatment regimen post-discharge.

The “invisible hand” of market forces is powerful. It is time for hospitals to empower their providers with medication cost data at the point of care. Only then will there be a check on irrational drug price increases, which are crippling our health system.

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